Question 1

Which of the following best describes a negative externality?

Accepted Answer

A cost that affects someone who is not directly involved in the production or consumption of a good or service.

Question 2

Suppose a factory emits pollution into the air, affecting nearby residents. The marginal social cost of production is higher than the marginal private cost. What is the likely result in the market for the factory's product?

Accepted Answer

The market will produce too much of the product, resulting in deadweight loss.

Question 3

Which of the following equations correctly represents the relationship between social cost, private cost, and external cost?

Accepted Answer

$$Social\ Cost = Private\ Cost + External\ Cost$$

Question 4

A college education is often cited as an example of a positive externality. Why?

Accepted Answer

The private benefit to the student is less than the social benefit to society.

Question 5

According to the Coase theorem, under what conditions can private bargaining lead to an efficient outcome in the presence of externalities?

Accepted Answer

Property rights are assigned and enforceable, and transaction costs are low.

Question 6

Which government policy is most appropriate for correcting a negative externality in production?

Accepted Answer

A Pigovian tax equal to the external cost

Question 7

If the government wants to encourage more consumption of a good with positive externalities, which policy should it implement?

Accepted Answer

Provide a subsidy to consumers or producers

Question 8

Which of the following is an example of a common resource?

Accepted Answer

Tuna in the ocean

Question 9

What is the main problem with providing public goods through markets?

Accepted Answer

People can free ride, enjoying the benefits without paying.

Question 10

Which of the following best describes the 'tragedy of the commons'?

Accepted Answer

A situation where common resources are overused because individuals ignore the external cost of their consumption.

Question 11

Suppose the government implements a cap-and-trade system for pollution. What is the main economic advantage of this system?

Accepted Answer

It allows pollution reduction to occur at the lowest possible cost.

Question 12

Which of the following equations shows the condition for the efficient level of pollution reduction?

Accepted Answer

$$Marginal\ Benefit\ of\ Pollution\ Reduction = Marginal\ Cost\ of\ Pollution\ Reduction$$

Question 13

Which of the following is a quasi-public good?

Accepted Answer

Toll road

Question 14

Why do common resources tend to be overconsumed?

Accepted Answer

Because individuals do not bear the full social cost of their consumption.

Question 15

Which of the following is NOT a requirement for the Coase theorem to hold?

Accepted Answer

Government-imposed taxes

Question 16

If the government imposes a Pigovian tax on a good with a negative externality, what happens to the supply curve?

Accepted Answer

It shifts up by the amount of the tax.

Question 17

Which of the following best explains why markets tend to provide the efficient quantity of private goods?

Accepted Answer

The person making the purchase decision is the only one benefiting from the good.

Question 18

A city is considering building a new public park. Which method should it use to estimate the efficient level of park provision?

Accepted Answer

Cost-benefit analysis

Question 19

Which of the following is an example of a policy that uses a command-and-control approach to reduce pollution?

Accepted Answer

Requiring car manufacturers to install catalytic converters

Question 20

If the marginal benefit of pollution reduction exceeds the marginal cost, what should be done to achieve efficiency?

Accepted Answer

Increase pollution reduction

Externalities, Environmental Policy, and Public Goods: Microeconomics Study Notes

Study Guide - Practice Questions

Study Guide - Flashcards